13 February 2017 EY Center for Tax Policy: This Week in Tax Reform for February 10 Congress in: The Senate and House are in session. The Senate confirmation vote on the nomination of Steven Mnuchin to be Treasury Secretary will take place on Monday, February 13 at 7 p.m. Following is a status update on President Trump's cabinet picks. Secretary of Defense — James Mattis - Jan. 20 Secretary of the Treasury — Steven Mnuchin — vote Feb. 13 Secretary of Housing and Urban Development — Ben Carson — Banking Jan. 24 Trump tax announcement in 2-3 weeks: President Trump February 9 said he would have a "phenomenal" announcement on tax policy within the next two or three weeks, and his spokesman elaborated that it would be the outline of a comprehensive plan addressing business and individual taxes. The President's remarks came during a meeting with airline industry executives, during which he called for: "Lowering the overall tax burden on American businesses, big league. That's coming along very well. Way ahead of schedule, I believe. And we're going to be announcing something, I would say, over the next two or three weeks that will be phenomenal in terms of tax." Lower taxes were part of a list of steps the President promised in order to improve air travel, which also included rolling back regulations and developing aviation infrastructure. The statement marks the first time the President has provided a timeframe for the release of his tax reform proposal, other than January comments that his team was "getting very close" to assembling something on the issue. During a February 10 news conference with Japanese Prime Minister Shinzo Abe, President Trump said the United States will be "an even bigger player" on trade, largely due to tax policy, "which you'll be seeing in the not-too-distant future." The President said, "We'll have an incentive-based policy much more so than we have right now," that he is working with Speaker Paul Ryan (R-WI) and Senate Majority Leader Mitch McConnell (R-KY), and "I think people are going to be very, very impressed." During a February 9 briefing, Press Secretary Sean Spicer said, "I think we're looking at in the next few weeks rolling out the outline of a comprehensive tax plan … that we'll be working with Congress on, that will address both the business side of the tax ledger as well as the individual rates." Asked whether the forthcoming plan would be a mix of what was proposed during the campaign and the House Republican Blueprint on tax reform, Spicer said: "I'm just going to say that you're going to have to wait a couple of weeks before we put out that outline." He said businesses are facing competition from abroad because of the tax code, which makes companies not want to stay in the United States. "The President recognizes that and what he wants to do is create a tax climate that not only keeps jobs here but … incentivizes companies to want to come here, to grow here, to create jobs here, to bring their profits back here," Spicer said, adding that the President and his staff have been engaged with members of Congress on the issue. Spicer also signaled the intent to use reconciliation instructions under the forthcoming FY 2018 budget resolution to advance tax reform, consistent with comments by Republican congressional leaders, and said the Administration will have a budget out in a few weeks. Bloomberg reported February 10 that Gary Cohn, director of the National Economic Council, is leading the effort to craft the President's tax plan, which is still under development and separate from the budget, according to a White House official. On Fox Business February 9, Counselor to the President Kellyanne Conway said President Trump had tax reform and middle-class tax relief as central to his campaign and, "He is going to make good on that promise early in his Administration." She noted it was June 2001 when President George W. Bush's tax bill was enacted and said, "This one will probably be much more bold and ambitious, and we are looking at the 1986 tax cuts by President Reagan." Questions over border adjustability: The President's statement on tax proposal timing followed a late February 3 tweet stating: "Countries charge U.S. companies taxes or tariffs while the U.S. charges them nothing or little. We should charge them SAME as they charge us!" However, neither this nor other White House statements thus far have answered one of the biggest questions of the tax reform discussion: whether President Trump will back the House Republican border adjustability proposal to exempt exports from tax but tax imports. Another key question is whether some Republican senators will oppose the proposal. In a February 8 Dear Colleague letter, Senator David Perdue (R-GA), the former CEO of the Reebok athletic brand and Dollar General stores, said the border adjustment tax is "regressive, hammers consumers, and shuts down economic growth." He said since all imports would be taxed, the "clear effect of the proposed border adjustment tax is an increase in consumer prices." Perdue said the argument that currency revaluation would strengthen the dollar and not actually create additional burdens for taxpayers would still result in "more losers than winners." He said a successful currency revaluation would "trigger a multi-trillion dollar reduction in the value of foreign investments held by U.S. investors including many pension funds and retirees." A separate document from the office of Senator Tom Cotton (R-AR) said the border adjustment tax: would affect "goods purchased by the working class," like food, apparel, toys, and gas; relies on assumptions about currency changes; and taxes the working class "to lower marginal rates for corporations." Additionally, Senator Mike Rounds (R-SD) said during a CNBC interview that he is not on board with the proposal at this point. "Any time we start talking about how we're going to regulate products going out and products coming in, we better darn well know what the impact on the economy is before we start making major changes," he said. Senator John Cornyn (R-TX) previously expressed skepticism about border adjustability. Additionally, some members of the House Freedom Caucus have concerns with the border adjustability proposal, said the group's chairman emeritus, Rep. Jim Jordan (R-OH) February 8 after meeting with Ways and Means Committee Chairman Kevin Brady (R-TX) a day earlier. "We have some concerns," Jordan said in a Bloomberg TV interview, adding that it is unclear whether the diverse membership of the group will support the idea. He said he has concerns with imposing a new tax: "I'm all for lowering the corporate rate, I'm all for making our tax code simpler, flatter, fairer, better. But do we really need a whole new revenue stream?" Brady expects bill in first half of year: Even before the President's statement, timing on tax reform was already a focus, with Chairman Brady saying February 7: "We are working on the final drafts of this and the elements of it … We are looking at a final draft and a bill I would imagine in the first half of this year. We haven't set a timetable on it, we are going to do it right." Asked during a Bloomberg TV interview about estimates that border adjustability could raise $1.1 trillion over 10 years toward a tax reform bill, the Chairman said that is "roughly the number on it" and that the proposal is "staying in our tax reform effort." Chairman Brady said he is "not expecting any exceptions or carve-outs" for the border adjustability proposal, but said during a separate Bloomberg BNA event that transition rules could soften the impact of the plan. He also said he expected to hold hearings on every element of the House Republican tax reform plan, but did not indicate a timeframe. Asked about the White House view on the plan, Chairman Brady referenced the President's February 3 tweet. He referenced the same tweet when asked during a February 9 Fox interview whether the President is on board with the border adjustability proposal, and also said Trump has "had a couple different approaches." Regarding the President's promise of a tax announcement, Chairman Brady said "we have been working very closely on it," the Administration and House Republicans are moving in the "same direction in a good way," and "I'm pretty positive about where this is going." According to Politico, Senate Finance Committee Chairman Orrin Hatch (R-UT), who has not put forward his own tax reform plan and wants more information before taking a position on border adjustability, said of the President's plans on February 9: "I've heard a little bit, and we've got a lot more to learn. But he's paying strict attention to what we're doing too, and he's made that very clear to me. So we'll see. I wish I had more to tell you at this time, but it's all kind of up in the air. We'll just have to see what happens." Roskam on border adjustability: During a Heritage Foundation event on February 6, Ways & Means Tax Policy Subcommittee Chairman Peter Roskam (R-IL) said, "We are at a national inflection point as it relates to tax reform" driven by factors that include widespread dissatisfaction with the current tax system, especially in terms of complexity, and inversions. "The base erosion of the US economy is really, really significant," he said, consistent with his remarks last month that the border adjustability proposal will prevent the need for complicated international tax rules. "And so now here we come and we've got a blueprint, and I would argue that we have essentially a collapsing window of opportunity right now to get this done," Roskam said. The House Republican Blueprint said exempting exports from US tax and taxing imports regardless of where they are produced will eliminate incentives for US businesses to move or locate operations outside of the United States under a territorial tax system, and therefore make new anti-base erosion measures unnecessary. Asked whether the WTO may object to the border adjustability proposal, Roskam said WTO has a three-part test: Is it a financial contribution to a business, a national preference, or an export subsidy? "If taking the VAT off is not an export subsidy, how is taking our tax off an export subsidy?" he asked. He said there is a "threshold fairness issue:" the proposal is moving toward a consumption tax and would assert a right to be treated in the same fashion as the rest of the world is. "We think that we have that right and we think that, when it all comes down to it, we will be exonerated on that," Roskam said. Buchanan at BPC pass-through event: On February 8, Rep. Vern Buchanan (R-FL), a Ways and Means Committee member, acknowledged the role of the border adjustability proposal as a pay-for and that it is a big factor in the debate, particularly as it relates to the effect on importers. Buchanan, who has been involved in the printing business and auto dealerships, said his biggest focus is lowering the rates for pass-through entities: "Congress needs to act swiftly and reduce tax rates on small businesses to jumpstart the economy." That was the focus of the Bipartisan Policy Center event at which he spoke, "Are Pass-Through Businesses the Key to Tax Reform?" Rep. Buchanan told reporters following his speech that Ways and Means is looking at ways to "blend" full expensing and interest deductibility so businesses could choose to take one tax break instead of the other or get a percentage of each, Bloomberg BNA reported. The Blueprint generally calls for 100% expensing of capital expenditures and elimination of the deduction for net interest expense. Asked during the event about pass-through changes for mutual funds or REITs, Buchanan said that is something members are still taking a look at, and that carried interest and other issues are still being considered. Tax Foundation border adjustment event: The debate over border adjustability continued in the press and at think tank events, including the Tax Foundation's February 6 "Discussion of Border Adjustability, Cash Flow Taxes, and U.S. Companies," featuring Elena Patel, Ph.D. Financial Economist, Office of Tax Analysis, U.S. Treasury, co-author of a January Treasury paper that generally concluded that a border-adjusted cash flow tax could expand the tax base. Patel said with limited real world experience, there is little to guide policy makers on the design and pressure points of a cash flow tax; further analysis is needed to understand implications for financial firms and pass-through businesses, as well as how to transition from one system to the next. "Our findings, coupled with the potential advantages that a cash flow tax provides in terms simplicity, incentives for growth, potential progressivity, and fewer distortions on firm location choices, lead us to conclude that this style of reform is promising," the paper said. Also at the event, William Gale, Co-Director of the Urban-Brookings Tax Policy Center, said the border adjustment tax has never been implemented anywhere, meaning there are a lot of un-dotted i's and uncrossed t's, and that there is a long way to go from a discussion of a paper to legislation to actually becoming enacted. He said there may be a need to move to a cash-flow tax and a need to lower the corporate tax rate, but probably not both. Gale asserted that the WTO is certain to reject border adjustment tax because imports must be treated the same as domestic goods: the proposal taxes the full value of imports but not domestic goods because it deducts wages. He said that could be avoided by making the system a VAT, with a payroll tax deduction or credit for payroll taxes paid. "There are ways to get wage subsidies into the system without sticking them into the corporate tax," Gale said. ACCF event: On February 8, the American Council for Capital Formation Center for Policy Research hosted a forum on "Understanding the Potential Impacts of Border Tax Adjustments" featuring Michael Graetz of Columbia University, Alan Viard of the American Enterprise Institute, and Gary Hufbauer of the Peterson Institute for International Economics (PIIE). Similar to Gale, Graetz said there is a high likelihood of a WTO finding of non-compliance and of other countries responding before WTO finishes. He said other countries are not going to stand for allowing the US to essentially strip royalties out of their tax bases under circumstances where we are not going to tax them; this is the way they are now reacting to tax havens. Graetz said he doesn't know if prices or exchange rates will adjust if the border tax adjustment is enacted, but both have risks; if the exchange rate adjusts, effects include US holders of foreign assets losing a significant amount of their value. According to Hufbauer, there is question of whether countries would take action prior to the WTO, such as through countervailing duties based on the argument that the border tax is a subsidy on US exports. He said the WTO issue arising from the border tax proposal's wage deduction for domestic goods but not for imports could be addressed through the payroll tax system. Viard repeated his earlier comment that there is no net revenue from a border adjustment and that he is very disappointed in how much prominence the temporary revenue gain is getting in the debate. "We worked five years in the Ways and Means Committee under my predecessor, Paul Ryan, and before that Dave Camp, to be ready. And last year, when Speaker Ryan pushed House Republicans in the Better Way Agenda, to have our solutions ready for when that window opens, and on November 9, the window didn't open. The voters threw a chair through it." — House Ways and Means Committee Chairman Kevin Brady (R-TX), February 9
Document ID: 2017-0300 | |||||
